Greenspan’s Novel Housing Bubble Theory

One of the salient differences between Greenspan’s and Bernanke’s tenure as Fed chairman (at least so far) was Greenspan’s skill at playing to his audience, which was the financial press, Congress, and market participants.

With the publication of his memoirs next week, Greenspan will be performing for a larger crowd, although it will be dominated by his core constituency. And while it is a bit unfair to judge a book by a quickie preview on the first page of the Wall Street Journal, I thought I’d hazard a couple of initial reactions.

The first is that the book offers from a new theory for why houses got pricey:

He attributes the housing boom to the end of communism, which he says unleashed hundreds of millions of workers on global markets, putting downward pressure on wages and prices, and thus on long-term interest rates…..

Mr. Greenspan returns repeatedly to the far-reaching importance of communism’s collapse. He says it discredited central planning throughout the world and inspired China and later India to throw off socialist policies. He recalls meeting a former manager of a produce distribution center in China who says he once had to labor to allocate produce according to government edict; now the allocations are made by auction. “Now I don’t have to get up at four a.m.,” he quotes the manager as saying. “I can sleep in and let the market do my job for me.” Mr. Greenspan recalls his amazement when an adviser to Russian President Vladimir Putin asks him to discuss Ayn Rand, the libertarian philosopher with whom Mr. Greenspan had been friends.

In coming years, as the globalization process winds down, he predicts inflation will become harder to contain. Recent increases in the price of imports from China and a rise in long-term interest rates suggest “the turn may be upon us sooner rather than later.”

Now I must confess I don’t follow the academic literature closely, but I can’t recall high housing prices linked to “the fall of communism.” And if that is what the book actually says, Greenspan is also guilty of sloppy writing.

Communism didn’t end with the fall of the Berlin Wall. China, North Korea, Laos, Cuba, and Vietnam are still communist. What ended with the collapse of the USSR was the faith in central planning.

Moreover, if the so-called fall of communism was so instrumental, why haven’t Eastern Germany or Russia played a bigger (any) role in the cheap US housing story? Eastern German workers, who had just about no useful skills, were a huge burden on West Germany. Similarly, the only outsourcing to Russia I know of is high end software development, and that is limited in scale because it requires top talent.

Greenspan’s version of history is ideological, his faith in Ayn Rand writ large. And of course, this telling also absolves him and other regulators of responsibility. In fairness, Bloomberg, which also has an article on the book, gives a much less barmy and ideological version of the theory:

U.S. wage earners have suffered and consumers have benefited from a one-time shift of millions of workers into the world labor force. The former chairman once defined globalization as the elimination of borders in the production of goods and services.

“The continuing acceleration of the flow of workers to competitive markets during the past decade has been a potent disinflationary force,” Greenspan writes. “That acceleration has held down inflation virtually uniformly across the globe.”

The difference between the Bloomberg and WSj reading is noteworthy. I’m not about to read the book, so I’ll have to endure a few more reviews to see which account appears to have been more representative.

Now one an argue that cheap labor played a role in the US housing boom. But “played a role” and “caused” are two very different statements. Even if you believe deflationary pressures led to a savings glut, blogger knzn points out that that is separate from the US overconsuming. These countries simply could have contended with the effects of a savings overhang.

In recounting his impressions of past presidents, Greenspan falls in with widespread disenchantment with Bush and the Republican Party:

In a withering critique of his fellow Republicans, former Federal Reserve Chairman Alan Greenspan says in his memoir that the party to which he has belonged all his life deserved to lose power last year for forsaking its small-government principles….

Mr. Greenspan criticizes both congressional Republicans and President George W. Bush for abandoning fiscal discipline.

Greenspan’s savaging of Bush reads like revisionist history. Yes, he did fail to serve as a salesman of Bush’s Social Security reform plan, and took issue with the use of the word “crisis” to highlight the problem. But for Greenspan to attack Bush for his budget deficits and fail to criticize Reagan for similar practices (tax cuts, a defense buildup, and resulting deficits) is disingenuous. And him minimal comments on Bernanke come off as damning with faint praise:

Mr. Greenspan makes no mention of his successor as Fed chairman, Mr. Bernanke, other than in a caption accompanying a picture: “I was very comfortable leaving the post in the hands of such an experienced successor.”

Better to have ditched the picture and said nothing at all.

Print Friendly, PDF & Email


  1. CrocodileChuck


    Thanks from an avid reader in Sydney-reading your posts has been the best part of the ride since August, ’07….we appreciate your logic and wide interests down here in the Antipodes

    Please look us up on your next visit and we shall be MOST pleased to shout you a drink

    Kind regards


  2. Anonymous

    I agree the Bloomberg account is less ideological than WSJ’s. Still, one wonders when we will observe seemingly intelligent folks ever get past the schizophrenia in such comments as “US wage earners have suffered and consumers have benefited from the one-time shift of millions of workers into the global labor force.” It is, of course, true that the top 10% in this nation are ‘consumers’ whose wages haven’t suffered. But, that aside, we must ask, “Who are these wage earners who have suffered and consumers who have benefitted?”

    Gosh. They are the same people!!

    Now, if the same person sees wages ‘suffer’ (remain flat or decline or go badly because of job loss, etc); yet, can go to the store and pay less — how does all that end up?

    I guess we’d need to know whether the lost wages were more than offset by the lower prices.

    Because if the opposite were true, then the only way the wage suffering but consumer benefitting folks could make do would be to …. to what? Spend all the savings? Borrow???

    And if we saw our wage suffering, consumption benefitting masses doing lots of borrowing…. gosh… where would that lead?

  3. Anonymous

    Long time reader, first comment…

    I feel that maybe Greenspan was painting with too broad a brush when he said “fall of communism”. Maybe he should have limited himself to just “the increased availability of labour…”.
    Further, American’s have always been the worlds biggest consumers….and on the other hand, the Chinese and the Indians being big savers do not consume the goods they produce and these are exported to the US..this increased availability of goods maybe contributed to the deflationary pressures.
    It is when the Chinese, Indians etc. start consuming (W.r.t simple as a govt. edict ;-) ) that there will be inflation world wide and the $ will be greatly devalued. (Americans now have no manufacturing…now they cannot borrow…so how will they consume ??).

    I agree that the above is too simplistic….just that I a Engineer….


  4. Anonymous

    Greenspan recapitalized the banking industry twice (92-94 & 02/03), pushing short term rates down so that financial inst. could borrow short and lend long. The bet worked. So, banks especially in 2002 & 2003 were again awash in fresh capital largely from intermediating a steep yield curve in a low volatility environment. The steep yield curve, and relatively low volatility, paved the way for all these “pay later” mortgage loans. Too much capital was chasing yield. He claimed recently on 60 Minutes he didn’t see the extent of the credit risks and wouldn’t have known what tool to employ to limit the irrational lending. Well Mr Free Market could have mandated that loans be underwritten at the fully indexed rate and not the teaser rate as a start. He claimed the Fed just doesn’t have that kind of clout sounds just a bit disingenuous (though I have great sympathies). I think his ideology sometimes collided with the practical aspects of his job and when in doubt, laisse faire ruled the day.

  5. Juan

    (last) anon,

    It helps to recognize that regulated banking intermediaries, the old banking system, has over the last roughly 15 years been largely displaced by a constellation of non-bank banks, and this on a more than national scale. Accordingly, the Fed has been substantially weakened in fact even if not in belief.

  6. Cassandra

    America blazed the trail in bringing Democracy to “the people”, (though since others have eclipsed our experiment). Again America has cut the path bringing leverage and credit to “the people” (and their pets mind you!) in quantities and on terms previously unknown and unimagined. One must wonder whether this little experiment will end in classical fashion, or whether we are about to witness a credit binge by the ROW following in America’s footsteps. For the sake of the environment and the planet, we should be rooting for the former.

  7. capitalist - socialist

    Strange, if that is what Mr Greenspan is trying to say from both the Bloomberg and WSJ reviews.

    The fall of Communism as an idealogy did not provide a one time shift in cheap labor as clearly shown between the GDR/UdSSR and PRC. Both are Communist but the economic success of each is respectively contrasting. Then, you have India, a full fledge democracy with lots of labor – but its economic growth of the past 2 decades were no match to PRC. What has that got to do with the failure of Communism?
    Sadly, the PRC in adopting Free Market policies are heading the way of Wall Street – the Chinese Stock Markets are many times larger, the Casino than Wall Street is. It will be the the Mother of all Casinos in years to come – why is the US so adamant for the Yuan to go free float ? Your Wall Street Bankers and Funds are already piling up the stakes there as they lick their recent wounds from Wall Street.
    Mr Greenspan, alluding to the release of cheap labor is half a truth – the other is the movement of capital which is the the more important truth. With that, the attendant play is no longer if another Michigan or Detriot plant shuts, the Treasury needs only to digitized more money supply into the system, more credit available, Wall Street takes a cut from both ends and never loses a hand.
    Losers – Joe and Sally !

Comments are closed.